What is the CIS?

The Construction Industry Scheme (CIS) was brought in by HMRC in 1971 to help minimise evasion in the construction industry, as well as to protect construction workers from being employed illegally and taken advantage of.

The scheme works by contractors taking money from their subcontractor’s wages in order to cover their tax and National Insurance contributions. In order to take part in the CIS, contractors and subcontractors must both be registered for the scheme before the work begins, and the scheme is not available to employees within the construction industry, as they are covered by the Pay As You Earn (PAYE) system.

 

When does CIS apply?

CIS is applicable to any payments made under a construction contract, between a contractor and a subcontractor, as long as it is not an employment contract. Even if the contract covers something other than construction, the CIS regime will apply to all payments made under that contract. Thus, many contractors find it easier to split the contract so that only payments relating to construction specifically are covered by the CIS scheme.

Contractors who can register for the scheme include property developers and builders, as well as businesses who are not in the construction industry but who have spent more than £1 million on construction operations in the last 3 accounting periods.

The types of work that are considered ‘construction’ for these purposes include:

  • Groundwork
  • General building (bricklaying, plastering and so on)
  • Alterations
  • Building repairs
  • Building demolition

CIS does not apply to some elements of construction, though, meaning that contractors and subcontractors working in these areas will not be eligible to apply:

  • Architectural services
  • Surveying
  • Carpet fitting
  • Delivering building supplies and materials
  • People who work on construction sites but are not part of the construction industry (canteen workers etc)

 

How much is the CIS deduction?

Subcontractors who are registered to the CIS scheme will have 20% tax deducted from their salary. Subcontractors who have not signed up for the scheme are liable to a 30% deduction. For this reason, it makes sense for all subcontractors to sign up to the scheme.

 

What are the benefits of CIS?

Working as a contractor can offer a lot more freedom when it comes to the work that you take on and the hours that you work, but one of the main drawbacks is that it can be hard to enforce payments on your invoices. CIS guarantees you a regular income and being paid for the work that you have done, and makes it harder for contractors to get out of paying you by going missing.

You will also receive the benefit of your tax and National Insurance being covered outside of the pay that you receive, making it easier for you to complete your tax return at the end of each financial year.

 

Do I need to be CIS registered?

You do not legally have to sign up for the CIS scheme as a subcontractor, although it makes sense financially to do so to avoid having to pay an extra 10% in tax from your pay. 

Another alternative to CIS is applying for gross payment, which is available for subcontractors who have an annual turnover of more than £30,000 and have an excellent history with tax compliance. In this case you will be able to receive the full amount of your payment, and pay any tax on your own at the end of each tax year.

 

How can a subcontractor apply to receive gross payments?

A subcontractor might be able to receive gross payments (the sum of all of the money they have earned before deductions have been made) from a contractor in some situations. If they wish to do this, they must provide evidence to prove that they pass the following tests.

 

Business test

All construction work must have been carried out in the UK and the business must be predominantly run through a bank account.

 

Turnover test

Minimum limits on a subcontractor’s annual turnover exist in order to apply for gross salary. These limits are:

  • For an individual – turnover must be at least £30,000 annually from construction work alone
  • For a partnership – turnover must exceed either £200,000 or the multiple turnover threshold excluding the cost of materials. The multiple turnover threshold is the sum of each individual in the partnership multiplied by £30,000, plus the amount of the threshold each company in the partnership would obtain if that company were applying on their own.
  • For a company – turnover must exceed the lower of £200,000 and the sum of the number of directors multiplied by £30,000.

 

Compliance test

Businesses must prove that they have complied with all of their tax obligations for the 12 months preceding the date of their application, by supplying evidence of their accounts and any further required information. 

HMRC will use these tests to process the application and make a decision based on this as to whether or not a subcontractor is allowed to receive their gross payments from a contractor.

 

What’s new with CIS?

As of September 2018, any non-resident business engaging in construction matters which were taxed according to the CIS scheme are able to register online as a contractor or subcontractor. Before that, beginning in July 2016, any non-resident trading in, dealing in or developing land in the UK were required to register for either income tax or corporation tax.

As of April 2019, the security deposits’ legal regime for PAYE tax began to take into account CIS deductions, thanks to the Finance Act 2019 which empowers HMRC to force businesses to hand over details of any securities if HMRC believes that this company is a high-risk for non-compliance.

Finally, it has been suggested that as of April 2020, CIS deductions could be considered a secondary preferential creditor if a business becomes insolvent.

 

More information

CIS has been with us a long time but is still a topic that causes a good degree of confusion as well as having several pitfalls for the unwary in terms of complying with it correctly.

 

If you need help with this, or any other accountancy matter, then please feel free to get in touch. You can reach us on 01473 744 700 or email us on contactus@aag-accountants.co.uk.

Working as a contractor or a freelancer has its benefits. For one, you have the ability to work around your own schedule without having management to answer to. Your focus is your clients and they are the only ones who you need to please.

The tricky part sets in, however, when it comes to managing your own finances and keeping up with your legal obligations. From filing your tax returns accurately to ensuring that you are following the correct invoicing procedures, the administration side of your business will be your complete responsibility. Unless you decide to work under an umbrella company, that is.

When you make the decision to branch out and contract out your services, you have two choices. You can either register yourself as a limited company or you can seek the help of an established umbrella company.

Registering a company comes with many advantages but it also leaves your hands tied with the burdensome amounts of financial and administrative work it entails. For many contractors, this burden is too much and they decide to leave all of the legalities and paperwork in the hands of an umbrella company.

What Is an Umbrella Company?

An umbrella company gives contractors an opportunity to work for themselves but without the hassle of having to do all of the nitty-gritty paperwork. Essentially, you would become an employee of the umbrella company but you would still retain the freedom of an independent contractor.

Here’s how it works:

Umbrella companies work closely with recruitment agencies to source contractual work. When you join such a company, your services are contracted out to the end client or agency. Your sole responsibility is to then complete the project/s for the client accordingly and to submit the applicable timesheets to your umbrella company.

It’s at this point that they will invoice the end client (or agency) on your behalf. You will then receive your payment after the applicable tax payments, National Insurance contributions, and umbrella fees have been deducted.

After you have received your wages, the umbrella company will report your earnings to HMRC and pay your National Insurance and taxes on your behalf. This way, there will never be any loose ends for you to tie up and your admin will always be up to date. Plus, the tax man will be happy to have received all of your payments, and all your online filings will have been made on time.

What Are the Advantages of an Umbrella Company?

Handing over the running of your finances can always feel a bit daunting but if you do your research and join a legitimate umbrella company, then you can be assured that your earnings are in safe hands.

An umbrella company can feature the following benefits:

  • In terms of administration, there is practically none. This gives you more time to work on your client base and provide a more efficient service.
  • They are very easy to use. Simply send in your timesheets at the end of every week or month and wait to get paid.
  • Umbrella companies are perfectly suitable for both short-term and long-term contractors who want minimal input when it comes to the fine print.
  • You can rest assured knowing that your taxes and other legalities have been taken care of efficiently and promptly.
  • They are a good stepping stone for first-time contractors. If you are unsure of your new position, joining an umbrella company is one way of testing the “contracting waters” without being overwhelmed.
  • Payments by the end-client are generally transferred to the umbrella company faster than they would be made directly to you as the contractor. This is because the umbrella company will have a robust and efficient department dedicated to getting your money in on time.
  • With an umbrella company, you can be up and running in a matter of hours and start working on your contracts quicker – meaning you will get paid faster
  • Working via an umbrella company enables you to claim tax relief on expenses. We advise you, however, to be aware that the rules on these expenses have been tightened up by HMRC, so you will need to liaise with your umbrella company as to what is still permissible.
  • Working as an employee under an umbrella company gives you the freedom to manage your own business strategy without being indefinitely tied to one company or client.

You might also want to consider the implications if you fall within the IR35 legislation. If this is the case, then the pros of contracting through your own limited company are considerably reduced and an umbrella company may be the preferred overall solution. Umbrella companies make all of their payments through PAYE meaning IR35 compliance is taken care of.

Are There Any Disadvantages?

While working via an umbrella company has many positives, you may want to consider the drawbacks so that you can make an informed decision about whether it is the right fit for you.

The drawbacks of using an umbrella company are:

  • If you are looking to maximise your pay, then this might not be the best option for you. While many umbrella companies retain minimal fees, it is an expense that you could avoid.
  • You will have to rely on the umbrella company to ensure that you are paid on time. This is usually not a problem, however, if you choose to work under an established company.
  • You will have no involvement in the operation of the umbrella company itself. If you own a business then the final say will always be yours. If you are associated with an umbrella company, however, then they control your finances and your input is limited.
  • Umbrella employees will not qualify for the same tax breaks as a limited company director.

For many, these disadvantages are a price worth accepting. An umbrella company offers freedom by removing onerous obligations that would otherwise require you to set up a limited company – giving you more time to organise your professional life as you see fit.

How Do I Know If an Umbrella Company Is the Best Option for Me?

Understanding what is the best option for you can be somewhat of a challenge. This is your future after all and you want to make sure you take the best course for you. It is not only which route pays you more, it is what option is best for you in terms of the lifestyle you want to have. Do you want more freedom at the expense of less money in your pocket, or do you want to maximise your earnings?

Why not give us a call to discuss what is the most appropriate decision for you. The team here can help on this and anything else tax and accountancy related and would love to hear from you. You can reach us on 01473 744 700 or email us on contactus@aag-accountants.co.uk.

If you are thinking of closing your limited company, there are a number of steps that need to be taken to ensure that you have followed the correct procedures as set down by the law and your Articles of Association.

Please note that it is recommended that you seek professional advice as soon as possible to ensure that you are taking the right course of action.

The first thing to think about before winding up the company is whether or not the business is solvent. A solvent company is defined as one with enough in assets to repay all creditors in full, as well as have money left over to distribute amongst the company’s shareholders.

If your company is solvent then you are able to choose a Members Voluntary Liquidation (MVL) to wind up and dissolve the company. The process involved in an MVL is dictated in part by the law and in part by your own companies rules as set out in your Articles of Association. The key to successfully complete the procedure is by understanding how these two factors interact.

How to make a members voluntary liquidation

1. You will need to write down a signed declaration of solvency which includes:

  • The company name and official address
  • Any names and addresses of company directors
  • A statement of the company’s affairs, including assets and liabilities

2. The declaration should be signed by the majority of company directors or both directors if there are only 2 and witnessed by a solicitor or notary public.

3. A general meeting should be called within 5 weeks to pass a motion for MVL. Whilst the decision to wind up the company may be undertaken by the company directors, it must be passed by at least 75% of shareholders who have been given notice of the meeting.

4. Appoint a liquidator to be in charge of the process. Generally this will be someone outside the company, and is usually an accountant who has gone through specific training and has certain qualifications to allow them to practice as insolvency practitioners.

5. You need to advertise the resolution in The Gazette (which is the official public record for these types of notices), as well as sending your signed declaration to Companies House, within 14 days of the MVL motion passing.

The difference between MVL and dissolving a company

The simplest way to dissolve a company (also known as ‘striking off’) is to send a DS01 form to Companies House and pay the £10 fee. Notice to strike off will be posted in the Gazette and if there is no objection raised then your company will be dissolved within two months.

So why would any company choose the lengthier and more costly process of an MVL?

It all comes down to handling finances. With an MVL you involve a licensed insolvency practitioner, who has the skills and training necessary to handle the distribution of assets between shareholders correctly.

For businesses who do not hold very much in assets, striking off is no doubt the easiest way to go, although you would still need to be sure that you have enough to pay your debts and have made arrangements with your creditors. If the company is insolvent then striking off is not an option.

Any creditor that is owed money by your company can file an objection to the dissolution when listed in the Gazette and this will suspend your application. It is likely that your company would then have to apply for a different process to close – such as a CVL (Creditors Voluntary Liquidation) or administration.

What reasons are there to choose MVL?

  • You want to cease trading
  • There are a number of shareholders who want to split the company’s assets between them
  • You are looking to retire or move overseas
  • You own a group of companies and are looking to close a subsidiary company which is no longer active.

Benefits of an MVL

  • It saves time and effort in preparing tax returns and ensuring compliance as the Liquidator will do this on your behalf
  • Peace of mind for directors and shareholders alike
  • Reduces the risk to directors
  • Offers peace of mind to investors by simplifying the process and bringing in an unbiased party who will ensure that the assets of the company are distributed fairly.
  • Easy access to funds
  • There are lower tax rates on the money that is distributed amongst shareholders (explained further below).

One of the major benefits of an MVL for all shareholders is the tax breaks that it offers. Shareholder distributions are treated as capital distributions as opposed to dividends, meaning that they enjoy a lower rate of tax.

MVL distributions may also qualify for Entrepreneurs Relief, which is a government scheme that offers an even lower capital gains tax (10%) on any assets that qualify.

How much does an MVL cost?

The cost of an MVL varies depending on the liquidator that you hire and how complex your finances are to begin with. The cost of hiring an insolvency practitioner usually runs into four figures in most cases. If you want it to cost less then it is critical that the directors take care of most or all of the procedural issues before the process begins. This would include

  • Paying all liabilities
  • Completing and submitting any final returns
  • Deregistering for VAT
  • Deregistering as an employer
  • Preparing final accounts

Outside of this there will usually be costs in the form of placing notices in the Gazette and the fees associating when submitting official documentation. This will likely not come to more than a few hundred pounds.

Please note however that the procedure must always involve a liquidator, and since their fees account for the majority of the cost of an MVL there is a limit to the amount of money that can be saved.

What if your company is insolvent?

If you want to close your company but do not have the money to pay back your outstanding liabilities then an MVL is not suitable for you. In these cases it is up to you to find an alternative closure method.

Creditors Voluntary Liquidation (CVL)

Similar to an MVL, a CVL requires the company to follow a similar process to an MVL. Your appointed insolvency practitioner will realise all your assets and determine all the debts owed and distribute the remaining funds between your creditors in a certain order. The distribution hierarchy tends to follow the order of:

  • Secured creditors
  • Preferential creditors (unpaid employees, for example)
  • Unsecured creditors

Administration

During administration, your company will appoint an insolvency practitioner as an administrator, who will take over and look at the business to make a decision about what to do next.

They may, as with a CVL, attempt to pay back as much of your debt as possible with your assets, but they could decide to negotiate a Company Voluntary Arrangement (CVA) instead, so that you can keep trading in order to pay off your debts. Another option is that the administrator could sell your business to another company so that the business will go on trading with the same staff, orders and name, only owned by someone else. If there is nothing to sell and the company cannot be saved then the administrator will close it.

The difference between administration and a CVL is that the administrator is in charge of your business for the entire length of administration, and is able to make all decisions on its behalf.

How can we help

Closing a business is usually a time of great stress and worry for directors and shareholders alike. There are risks involved if it is done incorrectly so it is important that you consider your options carefully and come to a decision when you are armed with all the facts about your chosen closure method

An Accounting Gem adviser can give you the advice you need and talk you through all the options available. Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.

Anyone can start a business with a vague idea of what they want to do and a few marketable skills. However, to truly make it in business, you need to know what you’re doing. How you are going to not only create, but also develop your business and make it a success. This is where a business plan comes in.

What is a business plan?

A business plan is a sort of report, which lists the objectives of your business (what you want to do and what your ultimate goal is) as well as how you plan to achieve this. It doesn’t have to be a completely formal document, as it is only for yourself and any staff you might bring in later, and it shouldn’t be set in stone. The best business plans leave space for tweaking and changes later on, as you start to get a better understanding of the industry you are working in, what’s working with your business and what isn’t.

A business plan not only helps you to be clear on what you want to do, but it also offers a document you can look back on to see whether or not you are reaching your goals, to help you to decide how to move forward.

A business plan should have:

  • A summary of your business. This will include your mission statement and any ultimate goals that you have. This is where you will think about what makes your business different from others, and what it is you want to bring to the market.
  • What you do. What is your product? What services do you offer? What products and services would you like to offer as time goes on?
  • An operational overview. This is more technical and is for you to think about how you are going to provide a consistent product and service to your customers. This is truly important as it is what you and your staff can refer to, to ensure that customers enjoy the same product and service every time they use your business. It is this reliability that will keep them coming back again and again.
  • A financial plan. This will include a cash flow forecast, sales forecast, costs (employees, equipment, products), profit and loss statements and an overall balance sheet so that nothing about your finances is overlooked and you can pass this over to an accountant with ease.
  • A marketing analysis plan. This will answer questions such as: Who is your target audience? How are you going to target them? How are you going to sell to them?
  • Milestones and achievements. At the beginning, this section may feel a little bare, but that is the joy of updating your business plan as you go along. You will get to see your milestones and achievements reached and get a good gauge of how the business is performing overall.

 

Advantages of having a business plan

 

Is necessary for financing

A business plan helps you to show banks and other financiers that you are serious about your business, and that you have put enough thought and attention into your business that you are likely to succeed. A majority of businesses will fail in their first two years, and lenders want reassurance that you aren’t going to be one of them. If you approach a lender without a business plan, and aren’t able to communicate clear and researched ideas, chances are that you will be rejected for credit.

Helping your company to evolve

A business plan is important at the inception of your company, but it is just as important as you go along. If you set yourself realistic goals, you can be achieving them fairly regularly, helping you to understand your success. It can feel frustrating at the beginning of a company, when everything is taking a long time to get anywhere, but with a good business plan you can keep track of the progress that you are making. Later, when you are hiring staff, your business plan can act as an overview that helps them to integrate more quickly.

Sets priorities

It is tempting to try to do everything at once, when you set up a new business. Excitement about what you are doing and a wish to get everything you need into place as soon as possible can mean taking on too much. With a set list of the tasks that need to be done, and achievements that you want to make, you can allocate time and energy to the right tasks at the right times. Seeing your tasks written down will help you to prioritise, and set a structure that will help everything to come together later on.

When putting together your business plan, think about where you want to be in a year’s time and then come up with the things that you need to do to get there. Once you have this information, break it down into smaller, achievable chunks and before you know it you’ve just set out your own daily schedule without even noticing. Don’t forget to use this to delegate, if you have staff, to make it more likely that you will hit your targets.

Helps you to predict problems and form solutions

A business plan helps you to look to the future in a realistic way, working out how you are going to reach your goals, but understanding your limitations. A cash flow forecast means that you can see the honest truth about your financials and can start thinking about action plans for improving them. If you keep your business plan updated, you can spot negative trends early and correct them before they harm your business.

Keeps you accountable

Setting goals and timelines helps you to see where you were hoping to be by this time, and keep working towards that. It is far too easy to become stagnant if you have no real plan, once work starts coming in and you feel that you are doing well enough. Referring back to your business plan ensures that you don’t lose sight of what you were trying to achieve from the start.

Further information and help

Setting up in business is both an exciting and a nerve-wracking time. It usually involves juggling many balls at once and keeping to lots tight deadlines. With so many opportunities for things to go wrong it really is vital that you produce a business plan. It acts as both your operations manual and your business bible and by having a well-researched and realistic plan you are all set for business success.

For help in all business creation and taxation issues please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out how we can help.

As the years go by, government across the world are going digital in order to deliver services more efficiently. This goes for all areas of our lives, even how we pay our taxes. This year, HMRC are implementing Making Tax Digital, an initiative that intends to make all tax processes fully automated in the next couple of years. This should help businesses to regulate their tax more easily, should ensure less issues with tax avoidance and evasion, and streamline the process for businesses, accountants and HMRC themselves.

What is Making Tax Digital?

2015’s Budget set out governmental plans for a new, transformed tax system, including plans for a completely digital tax system. In December 2015, the Making Tax Digital roadmap was published, setting out plans to modernise the tax system in order to make it simpler and more efficient.

Originally, the proposals looked to phase in the implementation of digital record keeping and quarterly updating by businesses, self employed people and landlords between the tax years 2018/19 and 2020/21. After further discussion and review, in July 2017 it was decided to phase this in slower to give the system a chance to settle in, and any problems to be dealt with before the system was made mandatory for everyone.

By 1st April 2019, HMRC intend for all VAT-registered businesses earning over the VAT threshold (currently £85,000) to be complying with the Making Tax Digital legislation. Businesses will be required to move all of their accounts and tax information over to a digital service, which means that, for the most part, their tax will be worked out and paid automatically. This helps to avoid human error when it comes to paying taxes, as well as tackling tax evasion. Making Tax Digital is only currently applicable for VAT reporting, whilst corporation tax is planned to be implemented once it has been demonstrated that the technology and infrastructure is up to the task.

Who is exempt from making tax digital?

Whilst the intent was for all businesses and individuals to be logging and paying their tax by 2020, the government delayed this ambitious target following lobbying from business and trade groups. For those that currently are, or will be by April 2019, affected by the MTD legislations, they must submit their information digitally. However, there are some exceptions to the rule including:

  • Those who are digitally excluded, this may include people that cannot use computers or go online for religious reasons, people with disabilities, those whose age prevents them for using a computer easily, or those who live remotely and cannot get online easily.
  • Those who have a gross annual turnover of less that £10,000. This may include landlords, agency workers and contractors.

Unincorporated businesses with turnover of between £10,000 and the £85,000 VAT threshold will eventually be required to make their tax digital as well, and these businesses have the opportunity to switch to the digital system voluntarily as soon as they would like.

MTD benefits businesses

Although this process will eventually be a legal requirement, many businesses are moving over to the digital system already. Making Tax Digital isn’t only useful for the government to keep an eye on tax matters, but it also streamlines financial processes within businesses as well. Making Tax Digital will:

  • Help businesses to stay on top of record keeping, putting all of their accounts into sophisticated software that will help to work out tax and give a simpler representation of where the company stands financially.
  • Keep businesses abreast of what they owe and when, ensuring there is never a panic to get their accounts in order when it is time to return their tax return.
  • Give companies access to all of their tax information online in one place.
  • Help businesses to work collaboratively online with an agent without having to share files. It is easy to sign onto the accounts portal and view the same document at the same time.
  • Help businesses to plan and budget more effectively.

How to prepare for MTD

If you believe that you belong in the group which needs to have all of their taxes digital by April, it makes sense for you to start making arrangements sooner rather than later. This will allow you to be more accurate and take your time, instead of having to rush as the deadline approaches. Before you begin:

Decide if you need to move to digital

Although it is mandatory for those with a revenue of more than £85k, as mentioned above it can be a good idea for smaller businesses to voluntarily move over sooner rather than later. For a start it makes the whole process of working out and paying tax easier, and if you wait until everyone needs to do it you might find it harder to get help from HMRC if you run into problems. If you want to find out whether your business can move over to MTD, you can call HMRC or visit their website.

Register for a MTD webinar

HMRC are providing a series of webinars to help businesses to get ready for the deadline. The webinars are an hour long and provide information relating to

  • Compatible software
  • Making Tax Digital basics for digital record keeping
  • How to sign up for Making Tax Digital
  • How to submit your VAT returns

You can find these webinars and sign up for the next one at www.gov.uk

Where are we now?

Although the system is being launched in April of this year, it is very much a ‘soft landing’, giving companies time to get used to it. HMRC is not planning to impose penalties straight away and companies will not be fined if they don’t comply in time as long as they can be seen to be in progress. A ‘cut and paste; approach to adding existing accounts to software will be accepted until April 2020, meaning that your business has more than enough time to get used to using the software.

Further information and help

The digitisation of business accounts for VAT and tax reporting purposes was always an inevitability. While it strikes fear into many, most also realise that it will help them run their businesses more efficiently in the future. If you have not started your preparations, then it is definitely a good idea to start prioritising it now.

Speak to an advisor at Accounting Gem for more information. From friendly advice to full spectrum accountancy services, we are here to help. Please call on on 01473 744 700 or via email at contactus@aag-accountants.co.uk

2019 looks to be the year that HMRC crackdown on tax avoidance once and for all, making sure that larger companies who have been hoarding wealth and avoiding tax by diverting profits finally get their comeuppance. One of the ways in which tax avoidance is being tackled is with the profit diversion compliance facility.

What is diverted profits tax?

This tax is designed to target large multinationals who have been earning a lot of money in the UK, but diverting their profits overseas in order to avoid paying the right amount of tax in the countries that they operate in.

The profit is commonly sent overseas by manipulating transfer pricing. Transfer pricing refers to the way that transactions are conducted between different companies that are under common control in different countries. These transactions can be done at under or over value so that profits can be deflated in one company and inflated in another. Typically, an organisation will set its transfer pricing so that profits in its operations in high taxation countries are minimised or even eliminated – thereby avoiding corporation tax.

There are situations in which this can be an accident, in which case HMRC is happy to work with businesses to work out exactly how much they owe and reach a settlement. Some examples of where tax may be accidentally avoided through diverted profits are:

  • Situations in which a business has grown and developed over time, but failed to update its internal accounting practices.
  • Incidents where companies have miscalculated the value of their assets, or made incorrect assumptions relating to their worth.
  • Situations where a business might accidentally undervalue tax contributions made by staff in the UK, and overvalue the tax contributions made by staff working overseas.

However, this legislation is also in force to target companies that deliberately funnel their wealth and profits to headquarters based in very low, or no, tax countries. An example of this would be Amazon, which has its headquarters in Luxembourg but all of its human resources staff in the UK. HMRC intend to target all large multinational enterprises (MNE) in their investigations, so that all incidents of tax avoidance in this way are able to be uncovered.

DPT taxes profits at 25%, 5% higher than standard corporation tax, acting as both a deterrent for companies who might want to ‘risk it’ as well as a punitive measure for those who have been getting away without paying the right tax so far.

What is the Profit Diversion Compliance Facility?

For MNEs who want to stay ahead of the curve and look at their taxes before the new rules come into effect on 31st December 2019, the profit diversion compliance facility is available to help them to do so. This is a useful report which allows them to declare their earnings, paid taxes and anything that may have gone unpaid, ensuring that they are compliant with HMRC and the law. HMRC are also happy to work with these businesses, helping them to review and update their processes to ensure that everything is running smoothly going forward.

MNEs do not have to worry about using the profit diversion compliance facility if they are absolutely certain that they have kept all of their taxes up to date and paid everything that they owe, although they should be aware that in this case HMRC will investigate to make sure.

The final date to register with HMRC is 31st December but companies are able to register at any point, and 6 months from that date to compile and submit and full disclosure report.

The report will cover:

  • Facts and evidence – Companies will put together a complete list of financial outgoings, taxes paid and anything else that is relevant, as well as evidence to back it up.
  • Application of tax law to the facts – how relevant laws have been applied to the facts presented, and what conclusions have been drawn from these.
  • Penalties already administered – how bad behaviours have been investigated and dealt with
  • Proposal – how the company intends to settle any outstanding tax liabilities as well as penalties and interest
  • Declaration – will need to be signed by a senior financial officer
  • Supporting documents – any evidence or additional information

The report will need to be submitted with any back taxes that are owed, as well as any appropriate penalty fees. It is then up to HMRC to review this and decide whether this was the right amount and if they agree with the decision come to by the report.

If businesses have difficulty with any part of the process, they are able to contact HMRC, who will meet and talk with businesses who register for the facility to offer advice and support.

Why use the Profit Diversion Compliance Facility?

If HMRC are already conducting reviews, why should any business apply for the profit diversion compliance facility? The fact is that if you are a multinational enterprise with a subsidiary in a low income tax jurisdiction, chances are that you are already on HMRC’s list of companies to investigate. Thus, it is useful to get ahead of it for the following reasons:

  • Shows willing to deal with any issues yourself, demonstrating compliance and a wish to follow the law.
  • HMRC will not start investigating, or will put investigations that are already under way on hold, on any businesses who registers to make a disclosure before 31st December. This gives the business an opportunity to deal with it in their own time.
  • Voluntary disclosure may encourage HMRC to limit the penalties that are applied.
  • HMRC will not publicly release information about companies who have been penalised or deliberate tax avoidance if they voluntarily apply for the PDCF.
  • HMRC may avoid criminal prosecution on those who have deliberately avoided tax if they provide a full and accurate disclosure of their own free will.

What happens after you submit your report?

  • HMRC will contact you to let you know it has your report within 14 days. There is no need to chase up your report before this.
  • HMRC may contact you to go through any issues or queries relating to your report, and you may be asked to provide more evidence or answer further questions.
  • As long as you have paid any tax you believe you owe, HMRC will respond to your proposal within 3 months to let you know if it has been accepted or not.
  • HMRC will send you a letter of acceptance if they are happy that your report is accurate.

If HMRC do not accept your report, they will be in further contact to arrange the next steps. This may be directly between your business and HMRC, or a full investigation may be required.

Further information and help

It is unlikely that your company need worry about this, as it only really applies to multi nationals – however HMRC seem to be on the war path currently and if you are affected by any taxation or accounting issues then please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to discuss further.

If you are self-employed or a business owner, you’ll need to complete and file a tax return for each tax year. You need to be as clear and accurate as possible on your tax return so that you ensure that you are paying exactly the right amount. You also need to file your return on time to avoid having to pay a penalty.

There are various reasons that you might have to pay a penalty fee on your tax return, including:

  • Filing your tax return late – the deadline is 31st October for paper forms, and 31st January to file your return online.
  • Filling out your return incorrectly – this could be interpreted by HMRC that you have been careless in filling out your form or that you have deliberately left information out.
  • Paying your tax late
  • Failure to notify – this is when you start a new business or become self-employed but you do not tell HMRC that you need to fill out a tax return.
  • Failure to keep precise accounts – either by accident or in an attempt to pay less than you owe.

Paper vs. online tax returns

There are two ways to file your tax return. You can fill out and send back the paper form which you’re sent earlier in the year or you can register for online services with HMRC and fill your return out online. The deadline for returning your paper form is 31st October of the year that the return covers. If you have missed this deadline, there is no need to panic because you have until the 31st January the following year to fill out an online return.

However, if you do decide to send in a paper form and it reaches HMRC after the 31st October, you will still be fined even though the online deadline is still to come. It pays to be aware of this so that you leave yourself plenty of time to get your form sent back or sign up for online services.

What is a tax penalty?

You will be charged £100 immediately if your tax return is filed after 31st January. You then have 30 days to file your tax return after which point you will be penalised by a further 5% of your overall tax bill. If you fail to hand in your tax return after 90 days, you will then be charged £10 per day for every day that it remains unfiled.

You will also receive a penalty fee if you file your return on time, but then fail to pay your tax before the deadline. The penalty fee for this is usually interest on the amount that you owe, plus a 5% surcharge if your tax remains unpaid after the 28th February.

Incorrect tax return penalties

You may be penalised if your tax return is sent on time but contains mistakes. It is at the discretion of HMRC what this penalty is but usually:

  • There is no fine if HMRC deem that your file has been filled out carefully and otherwise correctly but you have made a small error.
  • If your return has been filled out incorrectly and HMRC believe that you have been careless, you will be fined 30% on the tax that you already owe.
  • If HMRC believes that you have deliberately underestimated your tax, you may be fined between 20% and 70%
  • If you have deliberately underestimated tax and then taken steps to conceal this, you may be fined up to 100% on top of the tax you already owe.

How to appeal

If you want to appeal a penalty decision, you should be aware that you need to do this within 30 days of the penalty notice. You can do this online for £100 fines although penalties over £100 should be done by post using form SA370 which you can download from the gov.uk website.

The only way to appeal successfully is to have a reasonable excuse as to why you have filed your return late or incorrectly. Reasonable excuses, accepted by HMRC, include:

  • A death in the family (either relatives, partner or children)
  • If you have had to go into hospital to stay
  • Problems relating to a disability that you have
  • Serious illness
  • Computer failure
  • Problems with HMRC online service
  • Fire, flood or theft

You should be prepared to provide evidence of any of these.

If HMRC accepts your appeal then your penalty fee will be paid back to you. If your appeal is unsuccessful then there is a second level of appeal where you can ask for another officer to look at your case. It is useful, though, if you are able to provide new evidence or further information if you want a better chance of your appeal being successful.

Alternative Dispute Resolution

Another option, more for businesses but also available for self-employed people, is to apply for Alternative Dispute Resolution (ADR). During Alternative Dispute Resolution a mediator will be assigned to go between yourself and HMRC, to help you to reach an agreement. This process is mostly designed for situations where the facts of the case are in question, where you feel that HMRC have made incorrect assumptions, or if you want to know why they have not accepted your evidence. You can apply for ADR using an online form at gov.uk.

First Tier Tax Tribunal

Your final port of call if HMRC rejects your appeal is to ask for your appeal to be heard by the Finance and Tax Tribunals. You may be able to get this done on paper but you should also be prepared to take your case to a real hearing in this case. If you want to take your case to tribunal, you need to start the process within 30 days of your appeal rejection.

Chances of success?

Figures released by the government in 2016 show that in 52% of cases where a tax return penalty was imposed, the decision was reversed after appeal. As long as you feel that your penalty wasn’t justified and you have evidence to support this, it is worth looking into appealing your penalty.

Want to know more

HMRC frequently make costly mistakes and getting them to acknowledge this and cancel any fines imposed can be a minefield for the unwary. Why not talk to the friendly staff at Accounting Gem who will be able to help and advice.
Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.

The Requirement to Correct, or RTC, is a piece of legislation which demands that all UK taxpayers to get in touch with HMRC and notify them if they have offshore tax liabilities that had so far gone undeclared. This includes Capital Gains Tax, Income Tax, and Inheritance Tax. 

The final date for RTC was 30th September 2018 for all tax which had gone undeclared before 6th April 2017. After this date, anyone who still has offshore tax liabilities is liable to receive a penalty.

Why was this legislation passed?

To understand the need for the RTC, you first need to understand how offshore tax evasion works. There are various ways in which an individual might avoid paying the correct amount of tax if they live abroad or have assets abroad. This may be on purpose, but could also be a mistake.

An individual might own a property abroad and decide to rent it out or sell it whilst they remain in the UK. If they do not inform HMRC about this income, this is tax evasion.

An individual may be the sole beneficiary to a will from a relative who lives abroad. If they then take over this person’s foreign bank account and they do not inform HMRC, this is also tax evasion.  

Businesses have been known to register their company in another country where they will pay less tax on their income even though they actually trade in the UK. This, too, would be considered offshore tax non-compliance. 

This is a bigger problem than it may first appear. A 2017 US study found that 73% of Fortune 500 companies were using offshore tax havens in 2016 to avoid paying the correct amount of tax. Corporate tax avoidance is estimated at $500bn, whilst personal tax evasion is estimated at $200bn.This is the case in America however the situation in the UK is comparable and, globally, around 8% of wealth is thought to be held offshore in an attempt to avoid paying the required tax on it.  

Everyone is legally required to pay tax on what they earn so HMRC is clamping down on UK residents with harsher penalties for those who continue to avoid paying what they owe.

Who does the RTC apply to?

  • Individuals, partnerships, trustees and some businesses who either live abroad but have a source of income (such as a rental property) in the UK.
  • Those who have undisclosed Income Tax, Inheritance Tax or Capital Gains Tax abroad.
  • Those with offshore income and gains (e.g. a property rented out abroad or sold and not reported to HMRC, or income made in the UK and transferred to an offshore account)

Foreign income includes:

  • Wages for anyone that works abroad but it a UK resident
  • Rental income or the sale of an overseas property
  • Foreign savings accounts, investments, pensions and inheritance

If you are not sure whether or not you need to declare any form of income, the best thing to do is to contact HMRC and discuss your personal circumstances. It is always better to find out sooner rather than later, to avoid harsher penalties.

What would count as offshore tax non-compliance?

There are plenty of different variations on what would count as non-compliance meaning that if you aren’t sure it’s really best to check with HMRC. However, everything usually falls under one of these three categories:

  • Failure to give notice of obligation to pay tax on your assets, under section 7 of TMA 1970
  • Failure to file a return or submit other documents with HMRC, that you are obligated to.
  • Delivering an inaccurate tax return or any other document with HMRC. This is particularly focused on returns which either understate the tax that you are liable to pay, or overinflates a loss to minimise the tax that you need to pay.

Are there any reasonable excuses?

HMRC will require anyone who failed to correct before 30th September 2018 to pay a penalty unless they have a reasonable excuse. It is at the discretion of HMRC whether or not they accept an excuse so it all comes down to the individual situation. However, HMRC are not willing to accept excuses where:

  • Tax was not paid or reported under advice from another party.
  • Tax was not paid or reported due to lack of funds (unless insufficient funds were caused by circumstances outside of your control).
  • Financial matters were left up to another person. 

A reasonable excuse may be accepted for the time period that the excuse covers (for example, if you were seriously ill or suffering a disability) but this must be corrected as soon as this problem ceases. So, for example, if you went into hospital for a long time and did not report tax or file a return during this time, you need to get in touch with HMRC as soon as you are out of hospital and file your return as soon as possible. HMRC would not accept you leaving it for a year after you have returned to work because you missed the deadline.

What are the penalties?

If you owe tax for offshore assets and have not informed HMRC then there will be a penalty. The minimum for this is 100% of the tax that has gone unrecovered, and the maximum is 200%. In cases where income and assets have been deliberately covered up, HMRC may even initiate a criminal prosecution.

HMRC intend to chase up all unrecovered tax but this will take some time as there is a sizeable amount of tax to deal with. They are giving themselves up to four years to claim back the tax from anyone whose mistake was not down to careless or deliberate behaviour. For those who have been deliberately hiding wealth, HMRC are allowing 20 years to work out and make a claim for this tax, as well as any penalties. However, for those who did correct this before 30th September 2018, there is no penalty, and they will just be asked to pay back the that they owe.

Further information and help

An Accounting Gem can talk you through all the options available to you regarding the Requirement to Correct Legislation. Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.

The self-assessment has been with us since its introduction in the tax year 1995/1996. Before the age of “tax doesn’t have to be taxing,” the responsibility of calculating what someone’s tax liability was belonged to HMRC. It will come as little surprise to anyone who has dealt with them that this frequently meant they were late in performing the calculations and, when they did, they were prone to making the odd error.

After self-assessment was introduced, this all changed. Now, the onus was on the tax payers themselves to figure out for themselves what was owed. This was a huge change and it is not surprising that, when the self-assessment pack arrived in the post, the taxpayer realised the weight of this responsibility on them and it made many of them very uncomfortable.

Over the many years it has been in operation, it now functions well for both taxpayers and HMRC alike. Currently, about half the people who have to fill them in do so because they are self employed and not paid via PAYE. Others who have to fill it in do so because they may have freelance earnings, they may derive income from property rental, among other reasons.

Directors of companies automatically receive a tax return as it is presumed that their tax affairs are complex and that they will have multiple sources of income.

What happened after it was introduced

In 2001, a report was produced for parliament detailing progress with self-assessment, some five years after it was introduced. The three main areas of focus for the report were

• success in identifying taxpayers,

• getting the tax returns in on time, and

• carrying out enquiries.

The report went in to some detail about the hidden economy, describing those who had not identified HMRC of their income and gains as ‘ghosts’ and ‘moonlighters’. It then went on to report that, as a result of the investigative work carried out by HMRC, these ‘ghosts’ had been obliged to pay some £22 million of additional tax for the tax year 1999/2000.

On a positive note, it was reported that 90% of assessments were filed on time. The 10% that were late were calculated to have cost the economy some £300 million because the missing payments and the cost of chasing tax payers up for remittance – this was after the automatic £100 late files were taken into account.

The self-assessment legislation gave HMRC with the power to conduct in depth audits on tax payers assessments in order to ensure figures were being accurately reported.  The self-assessments to examine were chosen at random and the results of the audits as a whole, whilst not considered definitive, did indicate that large amounts of tax were not being collected due to errors and omissions on the forms themselves.

How is it working today?

The jury is still out regarding how successful the self-assessment regime is today. There is some conjecture that errors that used to be made by HMRC under the previous provisions are now instead being made by tax payers themselves

A meta-analysis was performed on audits that were made during the period 1999 to 2009. Key findings of this report included the observation that 36% of all returns had some form of income under reporting. This figure rose to a significant 60% among those who were self-employed. Most of these underpayments were less than £1,000, however around 4% owed more than £10,000 – it was concluded that over half the tax revenue that was missing was down to this small minority of individuals.

The future of self-assessment

Around 11 million people are subject to self-assessment and the requirement to complete returns every year. In an effort to reduce this number, HMRC have introduced a scheme called Simple Assessment.

This method of tax calculation abandons the principle behind self assessment in that HMRC, instead, use existing data from past returns and calculate what they believe the tax liability to be. After this calculation has been made then the individual has 60 days to appeal. If no appeal is received then it is deemed to be correct and HMRC will expect payment to be made within the pre-existing deadlines.

While this scheme has been in development for a considerable amount of time, it has proven difficult to roll out to more than a small group of taxpayers. A critical government report initially delayed the roll our completely. However, it is now operational but it is unclear when and whether it will develop further and if its scope will expand.

Making Tax Digital (MTD) is a broad effort by HMRC to revolutionise income and expenditure reporting in the UK, and Self-assessment is an area it is area that is being targeted for an upgrade. Unlike the Simple Assessment program, this technology is actively being rolled out across a large swathe of the UK tax landscape, and if you are not affected by it now, it is likely you soon will be,

Initially MTD is available to individuals who have income from rental property and enables them to opt out of Self-assessment. By recording all your business transactions on MTD compliant software and submitting them directly to HMRC, it is possible for all your income tax calculations to be made by HMRC – removing the need for any paper-based forms.

In the future, HMRC wishes all individual payers to have a Personal Tax Account. This will enable them to manage all their tax affairs online with the ultimate aim of removing the need for Self-assessment for everyone

Need more information

Self-assessment will still be with us for a while, and regardless of how you report your income, it is still very beneficial to talk to a tax advisor so that you pay the least amount of tax possible. An Accounting Gem advisor can give you the advice you need and talk you through all the options available. Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.

Legislation comes into force in April 2019 that will force those who have used a disguised remuneration scheme to pay or receive wages to pay back the tax that they avoided, and thus owe to HMRC. But what does this mean and who is affected?

What is disguised remuneration?

Colloquially referred to as the ‘2019 Loan Charge’, disguised remuneration refers to earned income which was received via non-taxable means in order to avoid paying national insurance contributions or income tax. For the most part, this means ‘loans’ from an employer which were never expected to be paid back or accrue interest, meaning that they are essentially just a salary. Other forms of this include retirement benefit schemes and employee benefit trusts.

Of course, there are legitimate trusts, benefits and loans which can be given by employers to employees, but if these were never intended to be paid back, or have not been declared so that they can be taxed properly, then they count as disguised remuneration.

Who is affected by disguised renumeration?

Businesses who have avoided tax in this way deliberately should already be aware that they may become liable under this legislation and need to start thinking about how to pay the tax that they owe back. However, this can also affect contractors, agency workers, nurses and supply teachers, who may have been forced to use one of these schemes in order to work and be paid by a company. These people may not even know that they owe this tax.

Anyone who has taken temporary work or been paid by an umbrella company needs to look into their pay and work out whether or not they were paying the correct tax. The way that these schemes generally worked, was that a worker was paid for the temporary or contracting work that they did by a separate business (umbrella company). This company would take the full amount earned by the contractor and pay them minimum wage or just below, thus avoiding NI contributions and income tax, whilst keeping the rest of the wage in ‘fees’.

HMRC are looking at loans made to workers dating back to April 6th 1999, meaning that up to 2 decades worth of tax might be owed from one contractor or agency worker.

Shouldn’t the umbrella company be paying this tax?

Technically yes. It is down to the choices of the umbrella company that the tax wasn’t paid, and not the contractor in many cases. HMRC will first attempt to take the tax from this company before they approach the contractor apart from under certain circumstances, including:

  • If the company no longer exists.
  • If the company is based outside of the UK and thus isn’t liable to pay tax in the UK.
  • If the company exists but is unable to pay.
  • If the company exists but HMRC believe that you were always aware that you should have been paying tax on your earnings and failed to do so.

Workers may find this unfair, and it is, for those who were forced into the situation and are now being required to pay tax that a separate entity should have been paying. In this instance you should contact HMRC as soon as possible to discuss the situation, as HMRC is willing to work on a case-by-case basis and provide advice and assistance as long as you come forward and make your case as soon as you can.

What can you do if you think you’ve been affected?

The new legislation comes into effect on April 5th 2019 and businesses and individuals who think that this might affect them should come forward and settle their tax before this date. You can contact HMRC over the phone or online to discuss it if you aren’t sure whether or not you owe tax, and to talk about what you can do next.

If you have copies of your old wage slips and accounts this will make it easier for yourself and HMRC to work out whether or not you have paid all of the tax that you owe, as well as to work out what you still need to pay. If you have been filling out self-assessment tax returns, copies of these should also help you, and will make it much faster to find out how much tax you have already paid and what you should have been paying.

How can the tax bill be settled?

Tax will be added up as though all of the earnings happened in the past tax year (2018/19) and then taxed accordingly, presenting you with one overall tax bill. HMRC will allow businesses and individuals to set up payment plans to make paying the tax back more affordable.

Those with a taxable income of less than £30,000 can spread their payments out over 7 years, whilst those with an income of between £30,000 and £50,000 have 5 years to pay their bill. For higher earners, HMRC will entertain an application for an extended period as well, but this will be handled at the discretion of the HMRC and will require further information and evidence to work out.

Seeking advice

HMRC is willing to work directly with those who have already extricated themselves from a disguised remuneration scheme, or those who want to, and can help you to remedy the issue and get up to date with your tax. If you speak with them as early as possible. HMRC can help you to work out and settle up what you owe before you have to worry about paying any extra charges

If you feel uncomfortable with contacting HMRC directly, there are various charities who can help you. Tax Aid works with people under 60 and will act as a go-between with yourself and HMRC, whilst Tax Help for Older People provides free assistance for people aged 60 years and over. These charities are perfect for offering assistance and advice for those earning less than £20,000, who are those most likely to be negatively affected by this change in the law.

Further information and help

This legislation has been subject to huge controversy due to it’s potentially devastating consequences on the individuals affected. The best approach for working out a strategy with HMRC and not being steamrolled by them into a draconian agreement is to speak to an accountant who is familiar with the legislation and can present the best case on your behalf.
If you are affected and need help please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to discuss further.